RESTRICT China

From time to time, I like to read the full text of a legislative bill, if only to put my past work experience at the White House and my law degree to some good use. What caught my attention recently was the RESTRICT Act, which goes after the national security implications of Chinese technologies in the US. It is getting lots of traction in DC, so I read it – all 55-pages of it.

My one-sentence conclusion: if it becomes law, the RESTRICT Act basically spells “game over” for all Chinese technology companies seeking to do business in the US.

RESTRICT stands for Restricting the Emergence of Security Threats that Risk Information and Communications Technology. (Never underestimate how much energy Congressional staffers put into a catchy acronym to help pass a bill.) It covers all the potential dangers posed by technologies affiliated with America’s foreign adversaries – namely, the PRC (including Hong Kong and Macau), Russia, North Korea, Iran, Cuba, and Venezuela under Maduro. But everyone knows the bill is squarely aimed at China and, to a much lesser extent, Russia. (No one is concerned about the threat of networking equipment made in Iran or Cuba.)

What’s surprising to me is how extremely comprehensive the technology areas that are covered under this proposal, and how much power this bill gives the executive branch to ban (or restrict) these technologies for national security purposes.

Extremely Comprehensive

Section 5 of the bill outlines in great detail the types of technologies that are considered priorities to scrutinize. The list is long and covers essentially every type of technical product or service under the sun, so it really does not provide much “prioritization.” Everything is on the table and potentially problematic.

Some of the areas are to be expected: networking equipment, satellites, drones. Some of the areas are of obvious strategic value for both the US and China, so also expected: AI, quantum computing, biotech. But some areas that are quite innocuous, generic, and not strategic in nature are also included: e-commerce, CDNs, cloud-based SaaS products. Even open source software, which by definition is not “owned” by any company, let alone any country, is on the list.

The threshold that triggers scrutiny is also very low. For hardware, it is 1,000,000 units sold in the U.S. For software applications or services, it is 1,000,000 annual active users (not monthly or daily) who are located in the US (do not have to be US citizens). These thresholds are laid out in Section 2.

Like I said in the beginning, if passed, the RESTRICT will restrict the business operation of Chinese technology companies of almost any size in any industry.

Expansion of Executive Power

The scope of the RESTRICT Act goes well beyond banning TikTok or sanctioning Huawei. By providing an extremely broad and fairly loose framework, the bill empowers the President and the executive branch (specifically the Department of Commerce) to act swiftly with legal empowerment from Congress, which avoids the embarrassment of Trump’s previous attempt to ban TikTok and WeChat.

Quick flash back: two federal judges struck down Trump’s attempted ban in 2020, because his invocation of the International Emergency Economic Powers Act was deemed to have overstepped the power granted to the President. If the RESTRICT Act or something similar were law during the Trump administration, his ban likely would not have been struck down by the judicial branch. That’s likely why the Biden administration has not pursued a similar strategy and opted to negotiate with TikTok. That’s perhaps also why the Biden White House enthusiastically endorsed the RESTRICT Act the day it was announced. Banning is certainly easier than negotiating, and few have said “no” to getting more power.

Stepping back, the RESTRICT Act could be the largest expansion of executive power in the name of national security since the USA PATRIOT Act (also a pretty nifty name in legislative-acronym-making). In fact, the bill is directly built on the Patriot Act’s definition of what constitutes “critical infrastructure.”

Just like fighting global terrorism in 2001 after 9/11, there is no issue that enjoys more bipartisan support than fighting the China threat in 2023.

So What’s Next?

It is highly likely that the RESTRICT Act will become law sometime this year. The bill was introduced with bipartisan support by Senators Mark Warner and John Thune. Perennial bellwether swing vote, Senator Joe Manchin, also enthusiastically supports the bill. The White House, in its statement, voiced its unequivocal support and “urge Congress to act quickly to send it to the President’s desk.” Its passage is a question of when, not if, in my view.

Surely, the American Civil Liberties Union (ACLU) opposes this bill on First Amendment grounds, much in the same way that it opposed the Patriot Act. There is also a competing version proposed by the House, called the DATA Act (Deterring America’s Technological Adversaries Act – a more mediocre legislative acronym), so there may be some delay and haggling between the Senate and the House. But given that the China threat narrative is reaching a feverish pitch in DC, the bill would not be watered down and only become tougher, as if there’s any room to be more tough.

This is a harsh reality that Chinese technology companies of all sizes must now face, many of whom have benign and purely business intentions in their pursuit to enter the US market. It is theoretically possible that the RESTRICT Act, after passage, could: 1. Get challenged in court again; 2. Be poorly enforced by the Department of Commerce. But hoping that one of these two scenarios happens is not something to bank on.

Hope is not a strategy.

For founders and entrepreneurs, it's time to start recognizing this reality and plan your overseas market expansion activities elsewhere. There are plenty of opportunities still, albeit less profitable ones, in Southeast Asia, Latin America, the Middle East, and corners of the EU.

For VCs who invested in Chinese tech startups at rich valuations on the assumption that the US market is up for grabs, it's time to do an honest markdown of those deals and adjust expectations accordingly.

And while you make these adjustments, perhaps make some donations to the ACLU, as a Hail Mary.